Create a budget to become debt-free
The path to self-fulfillment begins with paying off your debts. This isn’t an oversimplification. Anyone who has experienced the burden of debt is painfully aware how financial obligations prevent them from achieving their life goals.
Living beyond one’s means is a form of imprisonment. Missing payments may provoke creditors to file lawsuits or report delinquency to credit score agencies which further harms one’s financial security. Many Americans are feeling the squeeze of excess as the average combined US credit card balance is $8,377. Some are even tens of thousands of dollars in the hole.
So, how can Americans abolish their debt? Creating and sticking to household budgets and prioritizing their spending.
What should you include in your household budget?
There are two major categories of spending: essential and discretionary. The essentials are those expenditures that cover your basic needs and include the following:
- Housing: Obviously, this includes your rent or mortgage; however, people often forget to make room in their budget for maintenance costs, property taxes, and homeowner’s or hazard insurance.
- Food: This covers the cost for groceries or eating at home. If you need help setting a limit, you can use the USDA Food Plans guide. Their data indicates that the average monthly cost of eating meals prepared at home for a family of two will range from $360 at the thrifty level to about $600 for a moderate-cost plan. For a family of four, grocery bills can range from about $560 to over $1000.
- Utilities: Includes electric or gas and water.
- Transportation: This covers your monthly car payment if you have one, auto insurance, maintenance such as tire replacement and oil changes, gas, and registration and tag renewal fees.
- Healthcare: Includes not only your monthly insurance premium but your copayments and other out-of-pocket expenses, such as over-the-counter medicine, as well.
- Clothing: We are a civilized nation after all. Account for everyday items as well as work clothes or uniforms.
- Personal care: What do you expect to spend on personal hygiene products?
Discretionary expenses are anything you can live without. This broad category includes:
- Entertainment: May include hobbies, travel, live events or movies, and subscription services such as Netflix, Hulu, iTunes Music, and cable.
- Dining out deserves its own column as the average American spends about $250 per month eating at restaurants and fast-food joints.
- Internet could be included under this category, but it depends on how often you need to access the web and what you’re doing online. For instance, people who work from home will probably need a reliable internet connection, while others who simply hop online for entertainment may be better off visiting their local library for a free connection.
- Cell phones, contrary to popular belief, are still a luxury in some cases. Like the internet, though, the necessity of a mobile device will depend on your situation.
- Miscellaneous: splurge shopping, gym memberships, alcohol, etc…
Prioritizing: do you really need that?
Setting a budget and sticking to it by prioritizing your needs above your wants will move you toward financial freedom. The priorities you set will depend on the goals you want to achieve. If you’re trying to pay off excessive debt, you need to ask yourself what you can live without. Weigh your options: cable or credit card payment, cell phone or savings, car payment or retirement fund?
If you’re drowning in credit card debt, New Era Debt Solutions can help you achieve financial freedom in as little as 28 months. Get started with your free debt analysis! Our financial experts can reduce the amount you owe and help you stay on track.